Demonetisation | The worst is behind the cement industry

Though the industry as a whole has been able to bear the brunt of demonetisation, the quarter was impacted by uncertainty and higher input prices, and most players may report volume decline and flat realisations. We take a look at the performance of a few key players and analyst predictions on the road ahead.

Ambuja Cements expects revival of demand in June
Government data is showing that industry-wide output in November rose 0.5 per cent from a year earlier, the slowest increase in a year. The Managing Director and Chief Executive Officer Ajay Kapur of Ambuja Cements said, ´Production in the January-October period climbed about 7 per cent, but demand will remain under pressure for two quarters.´

He further said that 60 per cent of the busi-¡ness is done in cash. In a bid to push sales, his company encouraged its 42,000 distributors and contractors to open business accounts with banks and bought more than 5,000 point-of-sales machines for its retail outlets. Ambuja is now relying on low-cost homes, and a cut in interest rates to help restore demand. ´The industry will see improvements in the near future as the government has taken steps to improve market conditions. Construction activity, especially in rural and semi-urban areas, is facing challenges due to heavy dependence on cash,´ Kapur said.

Ambuja is relying on Modi´s ´Housing for all´ programme that started in June 2015 to stimulate demand. The government aims to construct more than 20 million houses across the country by 2022. On December 31, Modi also announced rebates and interest waiver for home loans under the programme.

The housing program can generate an additional cement demand of 120-150 million tonnes (MT) over the next six years, versus the current annual off-take of 260-270 MT, Kapur said.

Ambuja´s shares have dropped 12.4 per cent since the Centre´s November 8 announcement. Larger rival UltraTech Cement Ltd has lost 15 per cent, almost five times as much as the losses in the NSE Nifty 50 Index in the same period.

´Cement demand is expected to drop 0.5 per cent in the financial year 2016-17 against our earlier estimate for a 5.5 per cent growth,´Emkay Global Financial Services Analyst Sanjeev Kumar Singh wrote in a report dated December 28. Brokerage Nirmal Bang Equities expects demand to decline 1.3 per cent in the year through March.

´We expect demand disruption to push down cement demand recovery by at least a year and hence capacity utilisation will be lower for a longer period than what was expected earlier,´Mangesh Bhadang, an analyst at Nirmal Bang, said in a December 2016 report.

Cement production growth forecast downgraded
India´s cement producers will be hit by the country´s controversial demonetisation programme and higher pet coke prices, according to ratings agency, India Ratings and Research (Ind-Ra).

According to Ind-Ra, cement production is likely to grow by 4 per cent in the 2017 fiscal (FY17). This is down from its earlier estimate of 4-6 per cent, as the real estate and construction sectors bear the brunt of the economic impacts of demonetisation, which saw the government ban higher denomination currency notes.

Lower cement output is expected in the November-December 2016 period, Ind-Ra said. Production growth was just 0.5 per cent in November, compared to 6.2 per cent in October and 4.3 per cent on average between April and November. Prices have also fallen between Rs 15 and Rs 20 per bag.

In addition to weaker demand, Indian cement producers are having to face the rise in the cost of pet coke to around $60-70 per tonne from $40 per tonne at the start of FY17. More costly pet coke ´ as well as higher diesel prices ´ increases input costs for cement production, while lower demand limits the ability of cement companies to pass on higher prices to their customers. The smaller producers will be under stress in coming quarters, according to Ind-Ra, although the outlook for bigger cement producers is more stable.

Demonetisation uncertainty may cause cement firms to report fall in volume The quarter was impacted by uncertainty due to currency demonetisation, and the cement sector will produce a mixed bag of results, says Kotak Securities. Most of the players may report volume decline and flat realisations. Cement players in northern India will report drop in volumes with sequential drop in realisations, and south India-based players will report healthy volume growth coupled with sequential improvement in realisations.

For Q3FY17, cement prices have averaged Rs 326/bag´ flat sequentially, though up by Rs 16/bag y-o-y. The price improvement will be seen in the west and south as prices in central and north India trend lower. The sequential decline notwith-¡standing, cement prices in north, central and west India for Q3FY17E will appear substantially better off compared to the same period last year. Among our coverage, Orient Cement stands out for a strong 14 per cent q-o-q improvement in cement realisation owing to its large concentration in Maharashtra and Andhra Pradesh.

Our coverage universe will report a 3 per cent y-o-y decline in cement volumes, compared to 3.7 per cent y-o-y growth for October-November 2016 (based on DIPP), reflecting the impact of weakness in December 2016. Pan-India players will likely report decline in volumes (5-9 per cent) while players in southern India appear to have been less impacted owing to institutional demand likely in the AP/Telangana region that may allow players such as India Cement and Dalmia to continue to report healthy volume growth.

Burnpur Cement blames demonetisation
A small cement producer from eastern India, Burnpur Cement Ltd, has said in a regulatory filing that its repayments had turned ´irregular´with lenders because of ´depressed´ market conditions. It said that it had fallen behind on repayments due to impacted cash flow caused because of demonetisation. Burnpur Cement is planning to raise its production capacity from 600,000 tonnes, spread between two units, to 3 million tonnes (MT) per annum at a cost of Rs 500 crore. The firm, which reported revenue of Rs 88 crore and a net loss of Rs 12.7 crore in 2015-16, had long-term borrowings of Rs 202 crore. It also had around Rs 39 crore of short-term liabilities, or those that it had to pay off within a year.